|
PureBytes Links
Trading Reference Links
|
FYI...
JW
---------
http://www.businessweek.com/@@vr6dz2YQQW8RvgAA/premium/00_14/b3675109.ht
m
NEWS: ANALYSIS & COMMENTARY
Why Rates Are Acting So Funny
The almighty Federal Reserve raises interest rates, but borrowing costs
for home buyers and companies go down instead of up. What's wrong with
this picture?
In the Fed's dream world, its tightening moves would immediately raise
interest rates throughout the economy. But real life is more
complicated. While long-term rates did rise after the Fed began raising
rates last June, many key rates have edged back down since January.
WHETTING DEMAND. Ironically, one key reason is that investors are more
confident that the Fed has inflation under control. When the Fed raises
short-term rates, it tends to cool the economy and suppress inflation.
That expectation of low inflation in turn increases demand for long-term
fixed securities, which increases the price of long-term debt. And when
the price of bonds goes up, their yield, or interest rate, goes down.
At the same time, the interest-rate outlook has been complicated by the
Treasury Dept.'s decision to buy back government bonds with money from
the budget surplus. That's shrinking the supply of fixed-income
securities, even as the favorable inflation outlook is whetting demand
for them. The result, once again, is declining interest rates. The yield
on the 30-year Treasury bond is now down below 6%, back where it was
when the Fed began its rate hikes last June. And because there's more
demand for than supply of long bonds, investors who can't get 30-year
Treasuries are branching out into corporate bonds and mortgage-backed
securities. So their prices, too, are going up, driving yields down.
Since mortgage rates are set in relation to Treasuries, the drop in
Treasury yields has also kept a lid on home borrowing costs. ''I'm sure
the Fed thought mortgage rates would be much higher by now,'' says Ian
Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in
Valhalla, N.Y. If it weren't for the follow-on effect of Treasury
buybacks, Shepherdson estimates, mortgage rates today might be closer to
9% than their current 8.2%.
Corporate borrowers are also getting bargains. Rates on 10-year A-
corporate debt have fallen to 7.6% from 7.9% at the end of January.
''Corporate bond yields haven't risen more steeply because of the sense
that the Fed isn't resorting to an extended tightening campaign,'' says
John Lonski, chief economist at Moody's Investors Service.
To be sure, the Fed isn't powerless to make borrowing more costly. It
controls the federal funds rate, which is the short-term rate at which
banks lend to one another. If the Fed keeps tightening credit,
short-term rates will eventually get high enough to pull money away from
longer-term securities. Then, bond prices will go down and yields will
rise. Eventually, the Fed's rate hikes will really start to bite.
By Laura Cohn in Washington, with Debra Sparks in New York
|